CHICAGO — Fitch Ratings has affirmed the issuer default rating of Thomasville, Ga.-based Flowers Foods Inc. at “BBB,” while maintaining a “stable” outlook for the company. Fitch also assigned “BBB” ratings to the company’s senior unsecured revolving credit facility, senior unsecured term loan and senior unsecured notes.

According to Fitch, “BBB” ratings indicate that expectations of default risk are currently low. Additionally, the capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. 

“Flowers’ ratings reflect its leading position as the second largest producer of baked goods in the U.S., with annual revenue approaching $4 billion, good margins for the industry, as well as a history of successful acquisition integration and adjacent geographic expansion,” Fitch said. “Flowers is a low-cost operator in a highly mature industry. The company has steadily increased its market share as it acts as a consolidator in an industry with low single-digit volume declines throughout most of the past few years.”

Fitch noted in its report that Flowers’ credit protection measures are in line with the credit rating agency’s expectations following the $355 million debt-financed asset purchase of certain fresh bakery brands and related facilities from Old HB, Inc., formerly Hostess Brands, Inc., (Hostess) in July 2013. The Hostess acquisition followed several other recent acquisitions, including the purchase of Tasty Baking Co. in May 2011 for $172 million, Lepage Bakeries, Inc. in July 2012 for $382 million, and the Sara Lee bread, buns and roll brand in California in February 2013 for $42.5 million net.

Total debt has risen to $923.8 million at the end of 2013 from $127.3 million at the end of 2010, Fitch said, and for the latest 12 months ended Dec. 28, 2013, total adjusted debt-to-EBITDAR was 3.2x, funds from operations (F.F.O.) fixed-charge coverage was 3.3x and F.F.O. interest coverage was 10.4x.

In maintaining the “stable” outlook for Flowers, Fitch said it factored in the company’s publicly stated commitment to continue paying down debt following the Hostess acquisition.

“The company plans to bring leverage back below 1x EBITDA, which Fitch estimates would be approximately 2x total adjusted debt-to-EBITDAR, over the next 36 to 48 months, excluding any acquisitions that occur over that time,” the ratings agency said. “Fitch expects that the company will not execute any sizeable acquisitions in the near term. Fitch estimates that Flowers’ total adjusted debt-to-EBITDAR will fall to approximately the mid-2x range by the end of 2015 through a combination of debt reduction using free cash flow (FCF) and EBITDA growth.”

Fitch said it expects Flowers to generate more than $100 million in free cash flow in 2014, and an average of $125 million to $150 million in free cash flow annually over the next four years as the company continues to grow its revenue base. The ratings agency did caution that the free cash flow estimates exclude moderate periodic volatility, due to the timing of Flowers' commodity hedging on cash flow.

While recent acquisitions have greatly enhanced Flowers’ geographic footprint, Fitch indicated that Flowers’ fast growth has led to “modest margin deterioration due to the costs of expansion.” Those margins are expected to improve, though, as the company builds greater scale in regions it recently entered, slows its geographic expansion and builds market share in existing regions, Fitch said.

“The Hostess bread brands, including Wonder, and the Tastykake brand from Tasty Baking enable Flowers to bring a broader product selection into new and existing markets,” Fitch said. “The Wonder brand in particular is complementary to Flowers’ core brands, which are anchored by $1.1 billion annual revenue at retail from Nature’s Own. Flowers’ new goal is to reach 90% of the U.S. population over the long term. The current ratings and rating outlook assume this growth will be achieved at a measured pace.”